Gold has traditionally been an attractive investment for Indians

If, after the dotcom bust in 2001, you had invested Rs 100,000 in gold in India, your investment would now be worth Rs 630,000, a satisfying return of over 15 per cent a year, compounded annually. Gold has traditionally been an attractive investment for Indians and when returns are good, its lure is irresistible. Blinkers come on and Indians buy more and more of the yel-low metal with a single-minded focus.

This despite the fact that gold has not been all that glittering. Since 1979, when the BSE Sensex came into being, gold has offered to Indian investors returns of 10.4 per cent a year-i.e. the value of Rs 100,000 investment has risen to Rs 3,255,000-though interna-tional returns have been at 4.2 per cent a year. This is because over the past 35 years, the rupee has depreciated from around Rs 8 per US dollar to Rs 61.10, or about 6.2 per cent a year. An invest-ment of Rs 100,000 in the BSE Sensex, on the other hand, has yielded a return of 17.1 per annum, or an astounding Rs 25,519,000, over the same period.

So, if you are wondering whether this is a good time to invest in gold, consider both factors that will be at play: international prices and the expected movement of the rupee. Gold prices shot up from $271 in 2001 to $1,669 per ounce in 2012 as global production fell by 10 per cent, as central banks ramped up gold reserves in the wake of the 2008 financial crisis, and as in-creasing national debt weakened the US dollar relative to other currencies.

That gold is a safe investment can't be denied. It's a natural hedge against inflation, so those who want investment growth to match that of inflation are well served with it. That said, investors need to realise that international prices have dropped 21 per cent in the past two years to $1,312 per ounce. Indian gold prices have followed suit with a nine per cent fall from Rs 31,000 per 10 g to Rs 28,500. Luckily for the inv-estor, the fall has been cushioned by a 14 per cent depreciation of the rupee. Current market trends and expec-tations do not indicate a rise in global prices of gold. Indeed, some analysts predict the price to drop to $1,000 per ounce in a couple of years, a good 30 per cent lower than current levels. This, of course, doesn't mean that gold prices won't ever rise.

The other aspect that affects Indian gold investors is the expected movement of the rupee. Its sharp one-way depreciation since the 2008 crisis could be a thing of the past. Considering the expected growth rates and a positive change in sentiment towards India, the rupee may not depreciate by more than 4-6 per cent annually. And if our as-sumptions about international prices are correct, gold prices in India could actually fall further in absolute terms. Still, despite the gloomy outlook, we recommend 5 to 7 per cent of assets in gold. If you have not made this alloca-tion, build it over the next two to three months. Similarly, bring it down if you have invested in gold a little too much.

Investments in gold can be made in many forms. Earlier, jewellery and gold bars were the only options. But since 2007, the gold ETF (exchange traded fund) allows investment in gold in demat form. Mutual funds also have schemes that invest purely in gold. But before investing, it would be wise to consider all aspects of taxation, includ-ing wealth tax on physical gold, as well as storage risks and costs.